Is now the right time to refinance your mortgage?

The Federal Reserve proclaimed a hiatus on interest rate cuts at its meeting on January 28. Now, the bond market will boil with speculation on whether — and when — rate cuts are planned for 2026. How will mortgage and refinance rates react? Is now a good time to refinance your mortgage?

The Fed uses shorter-term interest rates to influence bond markets and steer the economy. By lowering the federal funds rate, it seeks to keep a lid on inflation — the higher cost of consumer goods.

The Fed lowered short-term interest rates three times in 2025. Now, the 2026 rate cuts are up for debate.

Mortgage rates don’t always respond directly to the Fed’s interest rate moves. Often, the 10-year Treasury yield, a proxy for mortgage rates, declines prior to a Fed announcement. Sometimes there is no bond market reaction to a Fed meeting at all. However, the week-to-week changes in the Treasury yield are a good indication of what is to come for mortgage rates.

It’s not a one-to-one interest rate relationship; there can be a 2% to 3% difference between Treasurys and mortgage rates. But the directional moves are coordinated.

Most mortgage market observers expect home loan rates to remain in the low-6% range through 2027.

In its latest housing outlook, Fannie Mae expected mortgage rates to be near 6% through the end of 2026 and into 2027. The Mortgage Bankers Association predicted 6.1% through 2026, and 6.2% to 6.3% in 2027.

Consider this: A 6% interest rate is good when you consider historical mortgage rates. The 50+ year average for mortgage rates is over 7.5%. Rates were in the 7% range way back in 1971 when Freddie Mac began keeping records.

In financial matters, people often search for easy answers. That’s often where “rule of thumb” guidance comes into play. How much money do you need to retire? What percentage of your retirement portfolio can you safely spend annually?

It’s the same for mortgage rates. The question often is: How much do interest rates need to drop before I should refinance into a new mortgage loan?

In the past, the easy estimate was 2%. Then, as rates fell, it was 1%. We’ve seen mortgage lenders say that a half-point — or even a quarter-point — drop in interest rates can make a refinance worthwhile.

Every easy answer is mostly just noise. Like all rules of thumb, a quick solution is not often the correct answer. Any financial decision needs an answer derived from actual math.

Here’s the five-step process to making a good decision when it comes to refinancing your mortgage:

Know your current interest rate, your monthly payment, and your credit score.
Determine if you’ll refinance your loan balance or would prefer a cash-out refinance.
Will you refinance for a loan term that equals or is shorter than the time remaining on your existing mortgage? (Preferred.) Or will you extend your debt? (Not preferred, but a worthwhile option in certain circumstances.)
Get an estimate of your closing costs from a mortgage refinance lender (or preferably two or more).
Determine how long it will take to recoup those new loan costs with your monthly savings on a lower interest rate. That’s your break-even point. Is it equal to or less than the time you plan on remaining in your current house? Good. Longer? Not good.

Now you have the answer to the question: Is it a good time to refinance your current mortgage?

About 80% of homeowners today have a mortgage with a rate of 6% or lower, according to Realtor.com. Over half have a rate below 4%. Rather than refinance, many of these owners tap their equity with a second mortgage, such as a home equity line of credit.

If you’ve been waiting for mortgage rates to provide an entry point for a refinance, a HELOC can be an alternative. Hang on to your low primary mortgage rate and unlock the value already accrued in your home. The line of credit allows you to access the cash you need, repay it, and repeat as needed.

Many HELOC lenders offer an introductory interest rate lower than the variable rate that kicks in later. Plus, if mortgage rates do go down, you can still jump into a refinance.

The Fed remains concerned about a return to higher inflation due to tariffs. Even with the central bank lowering short-term interest rates three times last year, inflation concerns can unnerve the bond market. That can cause mortgage rates to slip lower. Keep your eyes on the daily mortgage refinance rates.

It can be. Even if you’re on the margin for a mortgage rate improvement, there are many good reasons to refinance. For one thing, Americans are sitting on nearly $34 trillion of home equity, so many may choose a cash-out refinance — or a HELOC or home equity loan — to access that value for home improvements or other cash needs.

The cost of refinancing isn’t cheap. You’ll pay between 2% and 6% of the total loan amount in origination fees and closing costs. And if you extend your loan term when you refinance, you’ll pay way more interest over the life of the loan. Even no-closing-cost refinances have their pros and cons. Consider all of your options before jumping into a refi.

Laura Grace Tarpley edited this article.